Kuroda Endgame Seen as Swaps Climb Most Since ’10: Japan Credit

Haruhiko Kuroda, governor of the Bank of Japan, told lawmakers this week that the BOJ has a future exit strategy in mind while saying it’s too early to discuss the specifics of such a plan. Photographer: Tomohiro Ohsumi/Bloomberg

Two-year overnight-index swap rates that reflect investor
expectations for the Bank of Japan’s benchmark rate are set for
the biggest monthly jump since November 2010 and reached 0.095
percent this week, according to data compiled by Bloomberg. The
contract has climbed from a low of 0.039 percent in January to
the highest since July 2011, approaching the 0.1 percent upper
range of the Bank of Japan’s benchmark rate target. The
comparative swap rate in the U.S. was at 0.163 percent.

“Because the BOJ is providing a large amount of funds,
rates may fall in the near term, but it’s more natural to think
rates will rise in the future,” said Masaru Hamasaki, a senior
strategist in Tokyo at Sumitomo Mitsui Asset Management Co.,
which oversees the equivalent of $104 billion. “Overnight index
swaps signal future rates, so it makes sense for them to go
higher.”

The swaps suggest investors are growing more confident
Kuroda will drive inflation toward the 2 percent goal even as
skeptics from Bill Gross, who runs the world’s biggest bond
fund, to former BOJ Deputy Governor Kazumasa Iwata question
whether it can be achieved. A measure of consumer-price
expectations in Japan was at the highest on record after the
central bank announced on April 4 it will double its holdings of
government bonds and stock funds to help spur economic growth.

Target Change

The BOJ pledged to reach the price goal in two years and
switched its operation target to the monetary base -- cash in
circulation and the money that financial institutions have on
deposit at the central bank -- from the rate that banks charge
each other for overnight loans. Prime Minister Shinzo Abe has
called for “unlimited” stimulus by the central bank.

The two-year rate on overnight-index swaps, used to wager
on changes in the BOJ’s target rate, has risen 2.25 basis points
since the end of March. Receding expectations that the BOJ will
cut the 0.1 percent interest rate on excess reserves it pays to
lenders helped push up the rate, said Tadashi Matsukawa, the
head of fixed income investment at PineBridge Investments Japan
Co. in Tokyo. Kuroda said on April 4 there’s no need to reduce
the rate.

“The key to the success of Abe’s economic policy is low
bond yields,” said Matsukawa, who helps oversee about $1.4
billion in assets. “A cut in the excess-reserve rate is still
being kept as an option” for that purpose, he said.

The yield on Japan’s benchmark five-year note climbed to a
one-year high of 0.32 percent on April 11, more than tripling
from the all-time low of 0.095 percent reached last month. The
rate fell one basis point to 0.235 percent today.

Inflation Swaps

Japan’s five-year, zero-coupon inflation swap rate advanced
to 1.34 percent yesterday, the most on record going back to
2008, based on figures from Meitan Tradition Co. The contract
narrowed its spread from its U.S. equivalent to 1.14 percentage
points last week, the least since December 2008. The swaps allow
investors to exchange floating payments tied to an inflation
rate with fixed ones or vice versa.

Elsewhere in Japan’s credit markets, Bridgestone Corp. sold
30 billion yen ($305 million) of three-year, 0.247 percent notes
and 20 billion yen of five-year, 0.345 percent bonds, according
to a statement yesterday from Daiwa Securities Group Inc. The
yield premium of nine basis points for the longer securities
compared with the 23 basis point spread on five-year debt the
Tokyo-based tire maker offered in 2009, according to data
compiled by Bloomberg.

Mitsubishi Electric Corp. registered to issue as much as
200 billion yen of bonds, according to a filing with Japan’s
Ministry of Finance. It takes effect on April 25 and is valid
for two years.

Corporate Spreads

The extra yield that investors demand to own Japanese
corporate notes rather than sovereign debt rose to 38 basis
points yesterday after touching 37 on the previous day, matching
the lowest level since August 2011, according to Bank of America
Merrill Lynch index data. The spread for company bonds worldwide
was 145 basis points, or 1.45 percentage points.

Five-year credit-default swaps to insure Japan’s sovereign
debt were at 68.7 basis points yesterday after declining to 67.5
on April 16, the lowest level since March 20, according to data
provider CMA, which is owned by McGraw-Hill Cos. and compiles
prices quoted by dealers in the privately negotiated market. The
contracts were as high as 154 last year. A drop in the swaps
signals improving perceptions of creditworthiness, while an
increase suggests the opposite.

Gross’s View

Gross at Newport Beach, California-based Pimco said in a
Bloomberg Television interview on April 4 that the BOJ’s 2
percent inflation target is a “high bar to reach” and the two-year time frame may be “unrealistic.”

Iwata, the former BOJ deputy chief, said it’s
“impossible” to meet the deadline. Even five years won’t be
easy, Iwata, who now serves as the president of the Japan Center
for Economic Research, said in an interview last month.

An economist that taught Kuroda at Oxford University is
among the skeptics. Nobel Laureate James Mirrlees said in
Beijing yesterday he’s unsure the central bank will achieve its
objectives and that main impact will probably be higher share
prices.

The International Monetary Fund agrees with Kuroda that his
monetary stimulus can benefit the economy. It doubled Japan’s
fiscal 2014 growth forecast to 1.4 percent from its January
projection. The Washington-based fund said in its World Economic
Outlook report that the BOJ’s stimulus will help boost
inflation.

Inflation Forecast

Japan’s central bank is considering raising its inflation
forecast in its next outlook report due for release on April 26,
said people familiar with the BOJ’s discussions. It may upgrade
its view on price gains excluding fresh food to at least 1.5
percent from 0.9 percent for fiscal 2014, according to the
people, who asked not to be identified because the talks were
private. The so-called core inflation rate slid 0.3 percent in
February from a year earlier.

The yen has dropped about 19 percent against the U.S.
dollar in the past six months, the biggest loser among 31 major
currencies. It touched 99.95 per dollar last week, the weakest
in four years, and traded at 98.23 as of 1:14 p.m. in Tokyo. The
Topix Index of shares has surged 51 percent since Oct. 18.

“Although the yen has depreciated by a large amount over
the recent past, we think the monetary policy followed by the
BOJ is appropriate,” IMF Chief Economist Olivier Blanchard said
on April 16. “It is a logical consequence of appropriate
monetary policy.”

Bond Auctions

A Ministry of Finance sale of 1.1 trillion yen of 20-year
bonds today drew bids valued at 3.68 times the amount available,
the strongest demand since October, according to ministry data.
The yield on the securities fell two basis points to 1.475
percent at 1:11 p.m. in Tokyo after the auction.

That contrasted with the April 11 offering of 30-year debt,
which saw the widest gap on record between the average and
lowest bidding prices, signaling weaker demand. The so-called
tail at the April 16 offering of five-year notes increased to
the most since June 2008.

Japanese investors reduced their holdings of foreign debt
by 331.9 billion yen in the week ended April 12, the fifth week
of sales, separate Ministry of Finance data showed today.

Kuroda told lawmakers this week that the BOJ has a future
exit strategy in mind while saying it’s too early to discuss the
specifics of such a plan. Policies may include raising benchmark
borrowing costs or the interest rate on excess reserves, he
said. The central bank now buys the equivalent of 70 percent of
government bonds issued.

“The BOJ’s success in achieving 2 percent inflation in
about two years hinges on whether it can keep yields low,” said
Akito Fukunaga, the chief rates strategist in Tokyo at RBS
Securities Japan Ltd., a unit of Royal Bank of Scotland Group
Plc. “The BOJ has no choice but to keep buying government
bonds.”